Risks Associated With Single Tenant Net Lease (STNL) Investments and How to Mitigate Them?
Naturally, there’s no such thing as a “No Risk” investment property, but STNLs are no exception, but can mitigate much of the inherent risks. Here are a couple of risks you should consider before investing.
Although you’ll probably have 100% occupancy with a one-tenant property, also keep in mind that your rental income is completely dependent on only one business. If your tenant decides to vacate the property because of a bankruptcy or to end a lease, your income instantly drops to zero.
This is why, with an SNTL property, it’s very important to find a high-quality tenant whose business plan and business model is proven, and will continue to do well at the location (think legacy brands in QSR and Drugstores, such as McDonalds, Wendy’s, Starbucks, and Walgreens) and therefore unlikely to leave.
This kind of property can either be occupied or vacant. In case the tenant leaves, the income goes down to zero, and the owner is now fully responsible for maintenance, insurance, and taxes. Theoretically, when a property becomes vacant, you could lease it to another tenant, but it may not be so easy. This is why basic real estate fundamentals should always play a part in the decision making process. Be concerned about other traffic generators in the immediate area, growing/changing demographics, traffic counts, signalized intersections, and rent growth. All of these when taken into consideration will mitigate much of the risk of a long-term vacancy.
Sense of Security
A famous brand name on the sign doesn’t mean that the company will regularly pay the rent. It may sound surprising, but many well-known corporations may not actually sign a lease. Even if the building is a “company store,” the lessee can be a subsidiary, and the parent company may not guarantee the rent payments. Make sure that the guarantor on the lease is a strong operator, with multiple units backing them.
In some cases, the STNL real estate can be designed according to the specific requirements of a tenant. When you try to re-lease it to another tenant, the money and time lost can be significant. If a building is specialized, you need to be very careful. Even if the building is in a prime location, marketing and lease negotiations can impact your returns.
Understanding Rent Payability
Proper care is always needed when finding tenants, since the owners have to be sure they have the needed finances to pay the agreed rents. STNL properties are usually leased by a franchise. That is not necessarily bad, since many franchises are creditworthy. However, if the tenant seems to have strong credit, it does not necessarily mean that this is the case. It is necessary to analyze the company in detail, especially a franchise. Otherwise, it is easy to get into a deal with a company that is not creditworthy.
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